New Zealand's new government

The centre-right National Party will form the next government in New Zealand

New Zealand's centre-right National Party, led by John Key, swept to power in Saturday's general election, ending the nine-year premiership of Helen Clark of the centre-left Labour Party. Mr Key will seek to adopt a more pro-business policy agenda than the outgoing Labour-led government, although his immediate challenge will be simply to keep the recession-hit economy on the rails and to limit any further fall-out from the global financial crisis.

Like Labour before it, National will have to form a coalition government, having failed to win a clear majority on its own. National had been well ahead in opinion polls before the election, but New Zealand's mixed-member proportional-representation system tends to produce minority or coalition governments. In this context, National's election-day performance was impressive, with the party winning 59 out of the 122 seats in parliament, a gain of 11 seats and just three short of the number needed to form a government on its own. Labour, meanwhile, has lost six seats to finish on 43 seats. In a surprise move, the party's leader, Ms Clark, stepped down immediately after the result. (The election also saw the apparent end of another high-profile political career, as the ever-controversial Winston Peters lost his seat and his party, New Zealand First, lost all seven of its previous seats.)

National is set to form a coalition with two small parties, ACT New Zealand and United Future. ACT New Zealand has boosted its number of seats in parliament to five (from two previously), although United Future has lost one of the two seats it previously held. Altogether, these three parties would control 65 seats--by no means a commanding majority but far more comfortable than the position previously enjoyed by Labour, which was constantly vulnerable, in theory, to threats by informal allies not to support legislation.

National and the Maori Party are also believed to be considering some sort of co-operation, although a formal coalition with National would probably not be the Maori Party's first preference. The party won five seats in the November 8th election, a gain of one seat. Had the election been closer, the party could have emerged as a crucial kingmaker to either National or Labour. But any overtures by National towards the Maori Party may now be more by way of insurance--even a promise of informal support would make National less vulnerable to the effects of any disagreements with ACT New Zealand or United First. The shortness of New Zealand's election cycle--just three years--may also enter the political calculations. Remaining on friendly terms with the Maori Party could improve National's re-election prospects at the next election. One party that has ruled out forming a coalition with National, however, is the environmentalist Green Party, which came third in the election with eight seats.

Economic challenges

National comes to power at a time when New Zealand faces severe economic difficulties. Although the margin of Mr Key's election victory gives him a strong mandate, he will have little time to settle into the prime minister's role. Instead, he will have to act with urgency to shore up an already-recessionary economy and ensure that the global financial crisis does not further destabilise New Zealand's financial sector. Demand from some of New Zealand's key external markets, such as the US, Japan and Australia, is expected to soften significantly, while the domestic economy is also looking weak.

Like Barack Obama in the US, Mr Key's essential economic-policy challenge is that he will be expected to provide substantial economic stimulus as soon as he takes office, yet the weakness of the domestic economy will reduce tax revenues and limit his scope to raise spending without also increasing the fiscal burden. In early October the Treasury released a pre-election economic and fiscal update indicating that after 14 years in surplus the budget balance was set to slip into deficit. Unlike the US, of course, even with this gloomy projection New Zealand is still in a strong fiscal position. The long years of surplus--particularly the large budget surpluses of the past seven years--have increased the government's fiscal cushion, as public debt has fallen sharply to a modest 23% of GDP.

Despite the deteriorating outlook for the public finances, Mr Key is therefore unlikely to back down from his campaign promises to cut income taxes further (a move that would expand on recent cuts by the outgoing Labour-led government). The new administration is also expected to increase infrastructure spending, especially on roads and broadband telecoms. To prevent a sharp increase in the budget deficit in the short term, the new government may eliminate research and development tax credits for businesses and reduce tax credits and government subsidies for the KiwiSaver retirement savings scheme. National will also look to trim what it regards as low-priority spending and improve the efficiency of ministries. In any event, the fiscal conservatism implied by National's centre-right ideology means that the new government will seek to present most of its policy measures as having a long-term benefit for productivity and competitiveness.

The weak domestic economy, combined with inevitable voter fatigue after Labour's nine years in power, was a major contributor to the election defeat of Ms Clark's government. However, Mr Key's own honeymoon period is likely to be brief. Despite government efforts to boost growth, the global situation is so dire that New Zealand's economy is still likely to remain weak in 2009 and 2010—the Economist Intelligence Unit's current forecast is for 1.1% GDP growth next year, and 1.3% the following year. Mr Key, a 47-year-old former Merrill Lynch investment banker, has highlighted his financial-sector experience as an asset in a political leader at a time when an understanding of complex financial issues is paramount. But his investment-banking background and personal wealth could also become political liabilities if the country's economic problems worsen and more voters experience financial hardship.